Apple and five of the six biggest U.S. publishers accused of scheming to raise ebook prices throughout the industry, costing consumers millions. Case is being heard in U.S. federal court.

Apple Inc. is accused of being in a conspiracy with publishers to fix the price of ebooks.

Published on Mon Jun 03 2013

NEW YORK, N.Y.—Apple Inc., accused by the U.S. of being the ringmaster in a conspiracy with publishers to fix prices of electronic books, went to trial in a case chief executive officer Tim Cook called bizarre and vowed to fight.

A lawyer for the U.S. Justice Department began his opening statement in Manhattan federal court Monday in a rare antitrust trial to determine whether Apple orchestrated an illegal price-fixing agreement when it entered the ebooks market in 2010 with the introduction of the iPad. Lawyers for Apple are set to present their opening statement later Monday.

Apple and five of the six biggest U.S. publishers “consciously committed to a scheme to raise ebook prices throughout the industry” that cost consumers hundreds of millions of dollars, Justice Department lawyer Lawrence Buterman told U.S. District Judge Denise Cote.

Apple claims it did nothing wrong and says it benefited consumers by bringing innovation and competition to an ebooks market that was dominated by Amazon.com Inc. Apple is the last defendant remaining in the case after the five publishers sued by the government avoided trial by settling.

“You don’t see a lot of these antitrust trials,” said Andrew M. Friedman, a partner with the law firm Patton Boggs LLP in Washington. “It’s pretty unusual.”

The case is part of an upsurge in antitrust litigation by the Justice Department, reflecting an Obama administration that has been more aggressive than its predecessors in challenging companies. The government is seeking an order barring Apple from alleged anticompetitive actions, including price fixing, in the market for digital books.

A group of states, led by Texas, is also seeking fines and unspecified damages. A win for the government may fuel class actions by private plaintiffs seeking triple damages permitted under antitrust law.

Trial evidence is set to include e-mails and statements from Apple’s late founder, Steve Jobs, and testimony from Eddy Cue, the senior Apple executive who headed negotiations with the publishers.

The U.S. sued Apple and the publishers in April 2012. The government claims that in late 2009 and early 2010, before Apple introduced the iPad to the market, the company pushed publishers to sign agreements letting it sell digital copies of their books under what’s known as the agency model. Under that model, publishers, and not retailers, set prices for each book, with Apple getting 30 per cent.

At the time, Amazon, with its Kindle reader, sold nine out of 10 ebooks bought by consumers, according to Apple. Amazon was selling books to customers for $9.99, less than it paid publishers. Both sides agree Apple didn’t want to sell ebooks at a loss.

“The linchpin of this is whether there was a conspiracy and if Apple was part of it,” said Eugene F. Zelek Jr., an antitrust lawyer with Freeborn & Peters LLP in Chicago who isn’t involved in the case.

The government claims Apple led a conspiracy among the publishers. Apple denies it.

“Apple knew that the major publishers also disliked Amazon’s low prices and saw Apple’s potential entry as a pathway to higher retail prices industrywide,” the U.S. said in a court filing in April.

In addition to the agency model, Apple’s agreements with the publishers included “most favored nation” provisions that required them to match in Apple’s iBookstore any lower prices offered elsewhere by retailers including Amazon. Apple set pricing tiers — the company calls them caps — at $12.99 and $14.99 for most new books, according to the government.

Apple knew the combination of provisions would push the publishers to force Amazon into agency agreements, raising prices across the market, the U.S. claims.

The publishers have settled with the U.S., with states and with private plaintiffs for a total of at least $164 million. A sixth publisher, Random House Inc., didn’t sign an agency agreement with Apple and isn’t involved in the U.S. suit.

Chief executives of the publishers are on a list of witnesses to be called in the trial.

Apple says it acted unilaterally, for its own benefit. It denies conspiring with publishers to fix prices and says it engaged in weeks of tough negotiations with each of the publishers before getting them to agree.

“Agency was a logical model for a new entrant to the e-books business in 2009,” Apple said in a court filing. Publishers were holding back digital versions of books to avoid undercutting their bookstore sales, Apple said. Barnes & Noble Inc., the second-largest ebook seller, was pushing for agency agreements. Amazon considered switching to the agency model in reaction to Apple’s negotiations with publishers, Apple said.

Apple also claims consumers have benefited from its entry into the market, giving them access to more digital books, better ereaders and lower prices overall.

“The ebook case to me is bizarre. We’ve done nothing wrong there and so we’re taking a very principled position on this,” Cook, Apple’s CEO, said May 28 in an interview at the D: All Things Digital conference in Rancho Palos Verdes, California. “And so we’re going to fight.”

Part of Apple’s fight will be to win over Cote, who is hearing the case without a jury. Cote said in a final pretrial conference May 23 that the government has evidence to show that Apple knowingly participated in a conspiracy to raise ebook prices.

“It’s certainly a blow to Apple to get that kind of feedback going into a trial,” said Jonathan Kanter, an antitrust lawyer with the firm Cadwalader, Wickersham & Taft LLP in Washington.

Each side will have a total of 29 hours to present evidence. Cote has scheduled June 20 for closing arguments, after which she’ll consider the evidence and issue her ruling.

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